UNITED STATES—The ruckus that small businesses and their owners go through is an unending tale. The business owners get so apprehensive with a lot of unpaid invoices that it looks like the doors of their business would close soon enough. Sometimes it could be a lack of information that leaves them stuck. These days, they can get an invoice loan for their small businesses to settle debt or staff early and still have a booming business.
First, business owners need to know what an invoice loan means before they can have access to it. Invoice financing is a short-lived loan that a business owner applies for using the unsettled invoice of their customers. There are two aspects of invoice loan: invoice financing and invoice factoring.
With Invoice financing, they (business owners) borrow money from an invoice loan company while using overdue invoices of their customers as collateral. That means if their business is in an unbelievable state due to money owed them by their customers, a plausible invoice issued when the business transaction occurred could be used to acquire a loan with the payment date from customers in view.
On the other hand, invoice factoring entails them selling off the same unpaid customer invoices at a reduced amount (up to 90% of the total invoice amount) to the invoice loan company. But with this, the loan company is actively involved in your customer interaction and relationship and is at liberty to utilize any means they decide to get your customers to pay.
Note: Most business owners, especially small businesses do not opt for invoice factoring as their relationship with their customers may go sour due to the involvement of the third party (loan company).
Instead of this, how can they get invoice financing loans to help their small business?
What is the process of invoice financing loans?
Since it is now known that these small businesses borrow using the customer invoice as collateral, they will be in charge of collecting the payment and reimbursing the company.
So, the cycle goes thus: they offer goods and services to customers and write them an invoice, and because they do not want the late payment to cause a hinge on business growth and progress, they use the written invoice details to approach the lending company with which they get up to 85% of the gathered invoice total within 24 to 48 hours. The customers pay back what is owed at the agreed period, and they send back the 85% collected while retaining the 15% left.
Benchmark for invoice financing loan
Some financial loan companies do not pay much attention to how much profit their borrowers make or even the length of years the business has been operational. Their focus would largely be on the overdue invoice, visibility of the business, and creditworthiness of its customers. Others can request for more, like the business customer base estimate, the total turnover of the business in terms of finances, and so on.
What’s in it for the lender?
The process seems so effortless that they are prompted to ask what the loan company stands to gain. Have it in mind, that the invoice financing loan company charges more than the expected loans from banks but comes faster and with less protocol. But this is not all, there are agreed percentages and fees based on the amount involved.
The total charges range from 1-5% of the money. If they are given 85% of what the customer’s invoice says, there is still 15% left to be profited from. The entire 15% however does not belong to the business owner alone because this is where the factor fees are taken from. The fees could be charged weekly or monthly depending on the length of the payment term agreement (usually 30 days or at most 90 days)
For instance, if the total invoice reads as $5000, and the lender agrees to pay them 85% (that is $4,250). We have a 15% balance of $750. When the customers pay up, the 85% given is returned, but with the $750 left, assuming the lender charges a 3% factoring fee ($150), the business owner is left with $600.
To summarize, an invoice financial loan has an increased payable fee as against the conventional bank loan, still, funding is flexible (easily acquired), there is less protocol, lesser chances of rejection, there is continuous and adequate cash circulation, and great customer relationships for small businesses.